FPIs are unlikely to return in strength until the Covid second wave ebbs and the economy stabilises
Global liquidity, induced by monetary easing of central banks including the Federal Reserve and the European Central Bank, is likely to be robust through 2021. But the Indian equity market may not be able to benefit from these funds due to increasing uncertainty in economic outlook caused by the second wave of Covid-19. In its recent policy meeting, the Fed promised to continue buying at least $80 billion of treasury securities and $40 billion of mortgage-backed securities every month until it is satisfied about the US economy reaching its employment and inflation goals. Along with this, the $1.9 trillion stimulus announced by the Biden administration will also add to the global pool of investible funds. The ECB has also stated that it will increase its bond purchases to address the volatile bond yields in the euro zone. With policy rates in the US and many other advanced economies remaining at ultra-low levels, there will be no dearth of funds for global equity markets.
With the progress of the virus and the response of various governments being the key determinant for global asset allocations, it is not surprising that global funds have been flowing to markets in the US and EU, where the second wave of Covid-19 has been controlled effectively, as of now. Equity markets in these regions have delivered superior returns compared to India, since mid-February. A positive factor to note is that the domestic equity market has not declined too sharply over the past month, despite FPI selling. Domestic investors, including high networth individuals, who take a more long-term view , seem to be lending support to stock prices. If the second wave is controlled soon and the lockdowns do not extend for too long, the economy as well as stock prices can rebound, and FPIs may also resume their purchases of Indian equities. With global liquidity continuing to be ample, fund managers cannot afford to stay away from Indian stocks for long. The strength in the Indian rupee is also likely to weigh positively with foreign investors.